The Iranian flag hangs outside the Iranian embassy in London after diplomatic relations were restored with the UK. Photograph: Carl Court/AFP/Getty Images

The green, white, red tricolour flag of the Islamic republic rose over Iran's embassy in London on Thursday as the UK and Tehran restored direct diplomatic contacts through non-resident chargé d'affaires rather than via third-country intermediaries.

"The UK has agreed with Iran that from today bilateral relations will be conducted directly through non-resident Charges d'Affaires and officials," said a foreign office spokesperson. "We will no longer have formal Protecting Power arrangements in place. This is the next stage of the step-by-step process of taking forward our bilateral relationship with Iran."

Under the power arrangements, Oman was hosting Iran's interest section in London, while Sweden acted for the UK in Tehran. "We will no longer have Protecting Powers acting as intermediaries. Diplomatic contact will now be made direct between our two countries. Sweden will cease to be the UK's Protecting Power on 20 February 2014. Oman will cease to be Iran's Protecting Power in the UK," the spokesperson said.

Despite this, British and Iranian embassies in their respective capitals remain closed until capitals decide to upgrade to a full diplomatic status. The spokesperson said: "We have not taken any decision on reopening the British Embassy in Tehran. This will depend on the progress we make in our step-by-step approach. Our Embassy in Tehran remains closed, but a small number of our local staff are continuing to work on our compounds carrying out administrative and maintenance work."

On Thursday, the flag of the Islamic republic of Iran rose over the Iranian embassy in London as the mission is giving a limited consular service. The embassy is not yet officially reopened and permanent Iranian national staff are not yet stationed in London. The Swedish flag and a Swedish embassy British interests section' plaque was due to be removed from the two British Embassy compounds in Tehran. A British embassy plaque will instead go up soon, plus an 'Embassy Closed' sign.

In the absence of embassies, around 400,000 Iranian nationals living in the UK, and less than 100 UK nationals residing in Iran are facing difficulties with consular services, such as passport renewal or consular access.